In anticipation of watching Netflix’s Murder Among the Mormons,[fn1] I started rereading Victims: The LDS Church and the Mark Hofmann Case.[fn2]
And right at the end of chapter two something leapt out at me: in addition to searching for (and forging) rare documents, Hofmann engaged in tax planning! Chapter two discusses Hofmann’s attempts to sell the Anthon Transcript to the church. Initially he asked for a set of six Mormon gold pieces in exchange. Why the gold pieces rather than cash? In part, he said, because he wanted a “tax-free exchange” (Turley, 38). (Note that, after negotiation, the church gave him one five-dollar gold coin plus some historic Mormon notes and a first edition of the Book of Mormon missing its title page.)
Now if you’ve read much of my blogging, you know these three words leapt out at me, a virtual technicolor attention grabber. So what was Hofmann trying to do?
Here’s the short version: as a general rule under U.S. tax law, if you sell property for more than you bought it for,[fn3] you pay taxes on your gain. So, for instance, if I buy a saxophone for $1,000 and later sell it for $1,500, I have a $500 gain.
But let’s say I take that same saxophone and, instead of selling it for $1,500 cash, I trade it for a guitar with a value of $1,500? I don’t have any cash, but I still have a $500 gain. And I’m still going to have to pay taxes on that $500 gain.
But the tax law includes a lot of exceptions. One is an exception for a “like-kind exchange” of property for other property. What that means is, if my saxophone is qualifying property and I trade it for another saxophone worth $1,500, I don’t have to recognize and pay taxes on my gain.[fn4] So that’s what Hofmann wanted to do—he wanted to trade like-kind property so that he didn’t have to immediately recognize a gain.
So would it work? Well, today it wouldn’t. As part of the 2017 Tax Cuts and Jobs Act, Congress limited the like-kind exchange rule to real property. Since historic documents aren’t real property, the like-kind exchange rules don’t currently apply.
Back in the 80s they did, though. So could Hofmann do his trade tax-free?
That’s a really good question. To qualify as a tax-free like-kind exchange, property has to be held for business or investment purposes, not for personal purposes. I suspect Hofmann would have met this requirement: while he appeared passionate about historic documents, he really didn’t seem like a collector. He bought documents with the intention of selling them; presumably he planned to sell the gold coin, notes, and Book of Mormon. (If he displayed them in his house or otherwise did things that made him look more like a collector than an investor, that would have counted against this test.)
But here we run into real problems. See, the Treasury regulations explained how to determine whether depreciable personal property was like-kind: if the two types of property were members of the same General Asset Class or Product Class, they were like-kind. (Don’t worry about what GAC or PC are—they were listed in the regulations.)
But historic documents are not depreciable property and therefore were not members of any General Asset or Product Class. For non-depreciable personal property, the regulations say the like-kind exchange rules applied “only if the exchanged properties are of a like kind.” That’s right: the regulations literally use “like kind” to define whether property is like-kind property! So not super-helpful.
That said, I think saying that a historic document and a historic gold coin are like-kind is, at best, aggressive. (“Aggressive” is how tax attorneys say “I’m skeptical that this actually works.) And while the notes and Book of Mormon are both at least written documents, they both function significantly differently from a transcript with a historic signature. I don’t think it’s out of the question that they could have been like-kind property for these purposes, but I think it’s far from a slam dunk.
The problem, of course, is that there was basically no law on whether art and collectibles could be like-kind property and, if they could, what property qualified as like-kind. So while I think that if Hofmann characterized it as such he was at best pushing legal boundaries, I can’t be certain of it.
And how about the church’s treatment of the transaction? Well, as a tax-exempt organization, the church would be entirely indifferent as to whether the transaction qualified as a like-kind exchange or not. Either way, the church wouldn’t owe taxes on its gains.
[fn1] I’m currently about 10 minutes into Episode 1, so I can’t say anything intelligent about the documentary.
[fn2] Imagine my surprise when, years and years ago, my wife and I were exploring a used bookstore in Brooklyn and we came across a book about the Mark Hofmann forgeries and murders! A roommate at BYU had owned Salamander and I’d read it during my undergrad so I was at least a little familiar with the story at the time.
[fn3] Tax nerdery alert: technically, if you sell it for more than your adjusted basis, which is generally the amount you paid for it with certain adjustments. But honestly, the handful of people who are reading a Mormon blogpost about the Hofmann forgeries who really care about basis already know about it and understand it. For everybody else, I don’t want the details gumming up the big picture.
[fn4] It doesn’t mean the gain goes away: for tax purposes, I’m treated as if I had bought the new saxophone for $1,000 so, if I sell it later for $1,600, I have a $600 gain, not a $100 gain.
By Common Consent, a Mormon Blog 
(Warning: More lawyerly nerding out here. For all you non-lawyers out there, this is what law school is like.)
Let’s assume the Anthon Transcript and the Book of Mormon do qualify as a like-kind-exchange. What does the tax code say about the former having been a forgery. Does that matter? What if Hoffman’s document had been real, and the Church’s Book of Mormon (unbeknownst to it) were the fake? Does that change the analysis? Is there a BFQ-equivalent to the like-kind requirement?
TUManMI, that’s a really good question and one that has been addressed even less that the question of what kind of non-depreciable personal property counts as like-kind. I suspect that if it went to court, an apparently-qualifying like kind exchange that involved a forgery wouldn’t qualify for the forger (because I can’t imagine a way a modern forgery would be like-kind with a legit historical document). If it were the church’s Book of Mormon that was a forgery, otoh, I think it’s a harder question (because Hofmann believed it was real). At the very least, there wouldn’t be penalties at that point, I suspect.
Cool. That would have been my analysis as well. Borrow from the UCC and don’t punish people acting in good faith.
Paper (Anthon transcript) for paper (notes and Book of Mormon) would have been fine. But gold has inherent value outside of its historical context, so I can’t imagine it would have been deemed of like kind.
lastlemming, from what I’ve read of IRS pronouncements, circulating currency definitely doesn’t count. And I think gold currency is a huge stretch. But there really wasn’t a lot of guidance.
This is awesome. That is all.
So if I trade my hoard of Mark Hofmann forgeries for counterfeit money . . . .
Somewhat related question, Sam – what tax liability does the Church have, if any, in the potential disbursement of historical artifacts, as a non-profit? For example, donating items to museums, or transferring to BYUs, or exchanging for other items or property (even actual property). Are there tax implications for the purchase of historical documents or artifacts? Or, does it’s non-profit status simply give it carte blanche in the trade of such things. Finally, as many members have purchased items and donated them to the Church, I’m assuming the individual can take a deduction for the donation (not sure if they consider it in their annual tithing, which is a different question). That’s not really a tax/legal question, but I’m interested in the overlap between these types of donations and in-kind tithing contributions, and whether they are considered differently than monetary donations. Ok, that’s lots of questions, which you can ignore (a social science degree doesn’t really prepare one adequately for such things).
I once represented a client in a 1031 exchange (of real property, long before 2017), so this blog post quickened my pulse more than anything else I’ve read on BCC lately.
That and your reference to Brooklyn. Do you have any memory of where in Brooklyn you found a used book shop?
Mark, based on my bookmark it was either Park Slope Books or Heights Books. It also looks, based on Google, like neither one exists anymore.
Turtle, excellent questions. As to the first: a tax-exempt organization can buy and sell stuff. There’s a level at which that would get in the way of its tax-exempt qualifications but the occasional purchase and sale doesn’t rise to that level. (With documents related to its exempt purpose, it can probably even argue that the acquisition and preservation furthers its tax-exempt purpose.)
With respect to in-kind donations: those are not only deductible but it may be advantageous to donate them. If, for instance, you hold a share of Game Stop stock that you bought for ~$10 last September. Today it’s trading at $186. If you want to donate $186 to the church, you have a couple options. You could sell the stock and give $186 cash, which would give you a $186 charitable deduction (assuming you itemize). But you would also have $176 of taxable gain. By contrast, you could just donate the stock. You still get a $186 deduction but you don’t realize any gain. There are some limits on people’s ability to do this, but those limits will never capture normal people.
Great fun, Sam.
Thanks, Sam. Quite interesting. I have relatives who own stock for the exclusive purpose of eventually donating it in-kind as tithing, to avoid paying taxes on the gains while getting the full benefit for tithing. There’s a line between savvy and shady, but that’s for another day.
Also interesting that the Church can, in theory, act as a broker in documents (I’ve been watching the Netflix documentary, as well) without the same constraints that other brokers are required to manage. It’s interesting to me that, as you point out but not addressed in the documentary, the Church was willing to trade items with Hoffman. Basically, its role as a collector of “artifacts” that are historically important takes on a very different character when it is willing to part with some items for either profit or exchange.
Interesting stuff. The first comment triggered a non-tax but quirky question for me. Do known/infamous fakes like the Salamander Letter have value for their historical significance as a fake? Is there a specific market for fake collectibles / forgeries? I have to think there is.
Angela, that’s a great question. I’m with you–I have to assume that there is some value, at least for culturally-relevant forgeries and fake collectibles. But now I want to know what that value is!
@Angela, I have heard that Mark Hoffman may be famous for quite some time as there is quite a market specifically for Hoffman forgeries. HIs work was not limited to the church but included a lot of 18th-19th century Americana.
Here is a book about Hofmann forging an Emily Dickinson poem.